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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: shares with guaranteed returns: introduction

Avoidance using ‘shares as debt’

This guidance applies to companies that hold shares up to 21 April 2009. See CFM45510 (shares accounted for as liabilities) for guidance on shares held on or after this date, and CFM42000 for guidance on the disguised interest rules applicable to arrangements entered into on or after 22 April 2009.

Various schemes have been used to enable companies to convert what is economically interest into either capital gains, dividends on UK shares or tax nothings. A simple example is where a bank or other financial trader, instead of lending money at interest, would subscribe for redeemable fixed rate preference shares in a company and receive dividends instead of interest. The dividends were not liable to CT because of CTA09/S1285.

Such schemes are not limited to preference share lending, or to the financial sector. A variety of schemes have been developed, using derivatives in conjunction with shares, or deferred subscription agreements to create what is in form a share but in economic substance a deposit or loan, since in most of them the risks associated with equity investments, as well as the rewards, are removed or significantly reduced, leaving the share giving a return, either by the payment of ‘dividends’ or by a wholly predictable increase in value, which is the type of return expected from debt.

Some examples of schemes are given in CFM45020.

F(No2)A05 therefore introduced anti-avoidance provisions, usually referred to as the ‘shares as debt’ rules, to stop a range of financial product avoidance schemes. They apply on or after 16 March 2005 (i.e. Budget Day). CFM45290 describe the transitional rules which apply where shares begin or cease to be subject to these provisions.

These rules were originally at FA96/S91A to S91G, and are now set out in CTA09/PT6/CH7. This guidance refers to the CTA09 legislation except in relation to the commencement and transitional rules at CFM45270 onwards.